Cisco鈥檚 IoT transition
Cisco is a tech business primarily known for its networking equipment. Cisco is attempting to reinvent itself as an IoT, cloud and security services vendor.
Intro
Founded in 1984 by a pair of Stanford academics who commercialized routers, Cisco Systems (‘Cisco‘) has for years been synonymous with networking equipment.聽 The company leveraged the growth of IT to become one of the largest publicly-traded Silicon Valley tech companies.聽 However, in the past few years, Cisco鈥檚 overall revenue growth went to zero as its legacy networking business became increasingly commoditized.聽 Like other longstanding U.S. tech giants such as IBM and HP, Cisco is busy making diversifying bets.聽 Cisco currently has a market cap[1] of $170 billion.
Via R&D spend, venture investments and numerous acquisitions, Cisco is fighting to pivot away from its declining network switching businesses towards 3 newer IT markets that it believes will grow by double-digit percentage rates for years to come: cloud, security and IoT. 聽However, in all of them Cisco is mainly viewed as a peripheral player instead of a pioneer (this is despite the fact that Cisco coined the term IoT).聽 To change this perception and push itself into a 鈥榲alue-add鈥� IoT segment, in July of this year Cisco acquired Jasper Technologies (鈥�Jasper鈥�) for $1.4 billion; Jasper is a software platform that enables businesses to see, manage and analyze their IoT devices in real time. 聽Jasper has over 3,000 customers worldwide in a multiple industries. 聽The business has a few hundred employees and run-rate revenues of $125 million (growing by double-digits[2]).聽 Jasper has a SaaS revenue model, selling access to its cloud-based Control Center software and billing clients on a monthly per-device basis. A high-profile use case of the Jasper platform is the Amazon Kindle[3], where Jasper helped Amazon seamlessly enable e-book data transmission over 3G GSM to Kindle devices across a matrix of 30+ countries and dozens of telecom network providers.
In the brief video below, Cisco鈥檚 CEO Chuck Robbins talks about Cisco鈥檚 IoT strategy and how Jasper fits in it.
In a second video, Jasper鈥檚 product is showcased.
Future
In mid-2015, in the first leadership handover for many years, company veteran Chuck Robbins succeeded John Chambers as Cisco鈥檚 CEO. 聽So far, Gartner assigns Robbins鈥� current strategic direction a 鈥榮trong positive鈥� grade[4].聽 Robbins doubled-down on Cisco鈥檚 new focus on cloud/security/IoT, and the Jasper acquisition was one of his first major moves. 聽More controversially, Robbins also laid off聽14,000 (20%) out of Cisco鈥檚 70,000 employees globally[5], mainly in Cisco鈥檚 legacy businesses.
Today, Cisco still generates only 1/4th of its revenues from software & services (and the majority of service revenue relates to servicing the switching and routing hardware). 聽Cisco鈥檚 legacy architectural choices and ingrained perception by CIOs as a provider of hardware (vs ‘value-add software) create formidable challenges. 聽Even the Jasper acquisition – whilst it appears to make strategic sense聽and has garnered analyst praise – is unlikely to yield conclusive聽results until years into the future.
Just as Cisco鈥檚 lucrative legacy business became increasingly competitive and challenged, it is likely that in its attempt to shift to a different S-curve, Cisco will run into new competition. 聽Many other major IT vendors name IoT as a priority area, and some industrial majors (e.g. GE) do too.聽 No analyst has yet been able to make credible, widely-accepted predictions about which player will emerge as a massive IoT winner, how large the space will be, or what it will look like.
On paper, Cisco has a number of strategic & financial options on how to聽proceed in this dynamic, competitive environment.
- Option 1: more of the same, i.e. continue to support the organic and inorganic growth of its strategy; 聽continue to allocate the ~$10 billion of annual free cash flow from its core operations towards a mix of small-to-mid-sized acquisitions and stock buybacks.
- Option 2: make substantially more aggressive, more transformative acquisitions in the software/IoT/security space, eschewing buybacks and even tapping into Cisco鈥檚 $30 billion net cash position. 聽As an example, Cisco can also shift verticals and acquire IoT chip / RFID players (e.g. Impinj or Synopsys), or security/firewall vendors (e.g. Palo Alto Networks).
- Option 3: abandon the current diversifying strategy and instead merge with an old-tech competitor (HP) or partner (such as Ericsson) in an attempt to create value via cost synergies and further entrench itself with CIOs.
For the time being, Cisco will probably continue with Option 1. 聽However, history is littered with the names of former tech giants that gradually faded into obscurity by failing to aggressively reinvent themselves. 聽Could more drastic moves (Option 2) be warranted? 聽It is unclear. 聽Radical moves are risky: 聽in 2011, HP’s board fired CEO Leo Apotheker after he proposed completely exiting the legacy PC/laptop business and also executed a (in retrospect) disastrous $12 billion acquisition of a big data software vendor Autonomy. 聽Whatever Cisco chooses, it has its work cut out.
[~800 words]
[1] 17 November 2016, Bloomberg
[2] JPMorgan research
[3] Company, Cowen research
[4] Gartner鈥檚 vendor rating for Cisco
[5] Reuters
I agree that Cisco faces a challenging situation as it tries to innovate away from an immensely lucrative but secularly declining core business. One thing that Cisco should tackle head on is the rise of virtualized networking, where providers such as VMWare or Facebook provide software for clients to manage a network of commodity routers and switches as opposed to investing in the traditional, Cisco-dominated, network of relatively high-margin hardware with built-in software. While this would provide a short-term hit to revenue and margins, it is necessary to ensure that Cisco is able to compete in the next frontier of enterprise IT
I agree w/ Sam on the virtualized networking point, but I struggle w/ who to acquire given Cisco is predominantly good at hardware and somewhat untested in the software space. Virtualization providers like VMware make the most sense from a server first type strategy. Cisco owns a lot of the server infrastructure already and is a household name in this space. Option 3, buying another HW provider would be disastrous in terms of long term strategy.
I think there might also be an opportunity in cloud security. As we push to a virtualized world with enterprises storing data in the cloud, the industry is going to need a robust security provider, and no one has “won” in this space yet. I’d move to acquire a traditional security player (e.g. Norton or McAfee) as well as maybe VMware. In tangent partner w/ IBM (e.g., bluemix) and MSFT (azure) to provide what will be known as “cloud in a box” offerings to SMBs.